2013 (11) TMI 739 - HC - Income Tax

Interest on delayed payments qualifies as income from industrial undertaking for tax deductions under Sections 80HH and 80I.

Commissioner, Income Tax & Another Versus M/S Jindal Polyester And Steel Limited

The court held that the interest received from customers on delayed payments is considered income derived from the industrial undertaking and is eligible ... Whether interest received from the debtors or customers on delayed payment was income derived from the Industrial Undertaking and Deduction under Section 80 HH and 80 I of the I.T.Act – Held that:- Reliance has been placed on the judgment of Hon’ble Gujarat High Court in the case of Nirma Industries Ltd. V. Dy. CIT [2006 (2) TMI 92 - GUJARAT High Court], wherein it was held that when interest is paid on delayed payment, it can be treated as higher sale price which is converse situation to offering of cash discount because the transaction remains the same and there is no distinction as to the source. Looking from this angle, the interest becomes part of the higher sale price and is clearly derived from the sales made and is not divorced therefrom. It is, thus, the direct result of the sale of goods and the income is derived from the Business of industrial undertaking. In the instant case, respondent assessee received interest from trade debtors on outstanding balances. The interest so received is part of contract of sale and thus it is income from industrial undertaking belonging to the respondent assessee. The very source of interest so received is as per terms of contract of sale of goods manufactured in the industrial undertaking. Hence, it is inseparable part of contract of sale. Consequently it forms part of income of the assessee from the industrial undertaking and is thus eligible for deduction under Section 80HH & 80I of the Act – Decided against the Revenue. Issues Involved:1. Admissibility of deduction under Section 80HH and 80I of the Income Tax Act on interest received from debtors/customers on delayed payments.2. Whether the interest received is considered income derived from the industrial undertaking.Detailed Analysis:1. Admissibility of Deduction under Section 80HH and 80I:The core issue is whether the interest received from debtors/customers on delayed payments qualifies for deductions under Sections 80HH and 80I of the Income Tax Act. The appellant department contended that such interest does not constitute income derived from an industrial undertaking and hence is not eligible for the deductions. They argued that the Assessing Officer rightly excluded the interest income from the deductions, while the CIT(A) and ITAT erred in allowing it.The respondent assessee argued that the interest received from delayed payments is part of the sale consideration and thus income derived from the industrial undertaking. They cited various judgments to support their claim that such interest qualifies for deductions under Sections 80HH and 80I.2. Income Derived from Industrial Undertaking:The court examined whether the interest received on delayed payments is income derived from the industrial undertaking. The CIT(A) and ITAT had concluded that the interest income is indeed part of the business income derived from the industrial undertaking. The CIT(A) specifically noted that the interest was received from customers in the course of business for amounts outstanding on account of credit sales, making it an integral part of the business income.Findings:The court analyzed several precedents to determine the nature of interest income:- CIT v. Govinda Choudhury & Sons: The Supreme Court held that interest on delayed payments is attributable and incidental to the business and should be treated as business income.- CIT v. Poddar Pigments Ltd.: The Delhi High Court ruled that interest on delayed payments is part of the sale price and thus derived from the business of the industrial undertaking.- CIT v. Jackson Engineers Ltd.: The Delhi High Court held that interest from customers on delayed payments is part of the sale consideration and income derived from the business.- CIT v. Advance Detergents Ltd.: The Delhi High Court reiterated that interest on delayed payments from customers is part of the business income.- Phatela Cotgin Industries (P) Ltd. v. CIT: The Punjab and Haryana High Court held that interest on delayed payments is income derived from the industrial undertaking.- Tata Sponge Iron Ltd. v. CIT: The Orissa High Court concluded that interest earned from customers for delayed payments is income derived from the industrial undertaking.- CIT v. Indo Matsushita Carbon Co. Ltd.: The Madras High Court held that interest received from trade debtors on overdue payments is eligible for deductions under Sections 80HH and 80I.- Nirma Industries Ltd. v. DCIT: The Gujarat High Court held that interest on delayed payments is part of the sale consideration and income derived from the business.The court found that the interest received by the respondent assessee from trade debtors on outstanding balances is an inseparable part of the contract of sale. Hence, it forms part of the income derived from the industrial undertaking and is eligible for deductions under Sections 80HH and 80I.Conclusion:The court agreed with the findings of the CIT(A) and ITAT, holding that the interest received from customers on delayed payments is part of the income derived from the industrial undertaking. Consequently, it is eligible for deductions under Sections 80HH and 80I of the Income Tax Act. The appeal by the appellant department was dismissed, and the order of the ITAT was upheld.